CN1443334A - Method and apparatus for stock and index option price improvement, participation, and internalization - Google Patents

Abstract

A method for stock option trading includes receiving an option order at a market, contemporaneously receiving a copy of the option order at an electronic drop (EDrop) system, which is separate and distinct from the market, obtaining a potential cross quantity and a potential cross price based on the option order at the EDrop system, and submitting, through the EDrop system, a contra-order, with respect to the option order, to the market for fulfillment, wherein the contra-order specifies at least one of an underlying security potential cross quantity, and the potential cross price.

Description

Method and apparatus for price improvement, participation and internalization of security and index options

Background of the invention

The present invention relates generally to securities trading, and more particularly to a method for trading stock options that provides an intermediary with a copy of an order for stock options destined for a market.

Stock options provide a contract that allows the holder to buy or sell a security at a specified price during a specified period of time, independent of changes in the overall security market price during that period. Put options and call options purchased for speculation and preservation of value are usually made in anticipation of changes in stock prices. A put option allows its holder to sell or sell his shares at a fixed price to other holders of stock options even if the market price of the security falls. A call option, on the other hand, allows the holder to buy or purchase shares at a fixed price regardless of an increase in the market price of the security.

In the past, order flow providers (OFPs) generated stock options orders to buy or sell call options and put options. Specifically, OFP takes a user order (such as a buy sell order), encodes the order, and transmits the order directly to the market. A market (e.g., the Chicago Board Options Exchange or CBOE) receives the order and presents it to traders, who, through a process known as an auction, decide whether to fulfill part, all, or none (i.e., cancel) the order. The results of the bidding process are then returned to the OFP, and the user is then notified by the OFP.

However, the order flow processing mentioned above only provides an efficient mechanism for the market itself to trade stock options. In other words, order flow processing used to be a closed system. As a result, other individuals or organizations interested in participating in stock option trading and possibly changing the user's price are excluded.

There has long been a need in the industry for a method of trading stock options that addresses the above problems and others that have been experienced in the past.

Summary of the invention

A preferred embodiment of the present invention provides a method for stock option trading. The method includes the steps of: receiving a stock option order, stock option order copy, or stock option order information sufficient to determine the type of order, and related contracts from an order flow provider (hereinafter collectively referred to as a "stock option order copy") . The stock options order is simultaneously submitted to the market. The content identified in the copy of the stock option order includes: for example, put options, call options, contract elements including contract identifiers, high-quality securities, transaction prices, expiration dates, and stock option quantities. The method then determines the potential hedge amount and potential hedge price based on the stock option order and submits to the market an inverse order specifying the contract (including the premium security and the expiration date) (relative to the originally received stock option order) as well as potential hedge quantities and potential hedge prices.

A stock option order can be, for example, any one of buying a call option, selling a call option, buying a put option, and selling a put option. In this way, when the stock option order is to buy a call option, its reverse order is to sell a call option, and when the stock option order is to sell a call option, its reverse order is to buy a call option. Similarly, when the stock option order is to buy a put option, its reverse order is to sell a put option, and when the stock option order is to sell a put option, its reverse order is to buy a put option.

The method can also, for example, convert stock options orders from multiple OFP formats to a common internal trading system format. Similarly, the reverse order above can be formatted to fit any one of the intended target markets, including CBOE, PCOAST, AMEX, PHLX or ISE.

In some embodiments, the method can automatically determine the potential hedge amount and potential hedge price and submit the reverse order without human intervention. In other embodiments, the method may pop up a display on the trader's terminal showing contract elements, stock option bids or stock option asks, market bids and asks for premium securities, risk management information, etc. , and monitor the trader terminal for commit indicators (such as a click on the commit button). Also, the method can filter stock option orders before automatically submitting reverse orders or stock option orders with relevant information displayed on the trader terminal.

Brief description of the drawings

Figure 1 shows a stock option trading network.

Figure 2 shows a typical stock option popup window.

Figure 3 shows a data flow diagram for the EDrop server.

Figure 4 illustrates a method for stock option trading.

Detailed description of the invention

Turning now to FIG. 1 , a detailed diagram of a stock options trading network 100 is shown. In Fig. 1, solid arrows indicate traditional order flow processing, while dashed arrows indicate extended order flow processing which will be described in detail below. The network 100 includes an order flow provider (OFP) 102 , a marketplace 104 , and an EDrop (electronic drop) system 106 . In OFP102, a stock option order is generated by a host computer 108, and the order is transmitted to a server 112 in the market through a network 110. The specific market structure that will be discussed below is the Chicago Stock Options Exchange (CBOE), but it should be noted that this method of trading applies to any options market.

The server 112 provides the stock option order to the order routing system 114, which forwards the stock option order to the BART 116. BART (Automatic Routing Terminal) 116 is a deal offering system that allows OFP's staff to intercept orders for routing purposes. The order after routing by BART is suitable for packet reconstruction. This allows the company responsible for the BART terminal to specify what information can be passed to the PARS terminal. The PARS terminal is the destination for all BART orders and is held by brokers on the exchange. Once an order has been transmitted from BART to PARS, the order can then be executed. BART terminals are not limited by the number of PARS stations when buying and selling. This PARS allows companies to choose routes for their orders with certainty. One or more floor brokers 118 determine whether to fulfill all or part of the order, or to take no action for stock option orders. The last confirmed order is returned to the order routing system 114 via link 120 . The confirmed order will be processed by the transaction matching module 122, and the initial bill exchange function will be activated in this module. Unmatched transaction (ie, exited transactions) reports are returned to OFP 102 via link 124 , while matched transaction (ie, partially or fully fulfilled transactions) reports are transmitted to OCC 128 via link 126 . OCC (Stock Options Clearing Corporation) 128 performs pre-matched trade processing for final clearing and settlement and returns a matched trade report to OFP 102 via link 130 . Each link 124-130 represents a single connection through the network, or connections that are physically independent of each other.

For additional functionality of the EDrop system 106, it can also be extended to access the marketplace 104. EDrop system 106 includes, for example, an application server 132 (where executable applications are stored), an e-mail server 134 (responsible for sending and receiving e-mails), and a message queue (MQ) server 136 . The e-mail server 134 is not a necessary part of the EDrop process. Additionally, the EDrop system 106 includes a risk management server 138 (where risk management software runs), a quote server 104 (for receiving real-time quotes from external sources), and a gateway 142 (for communicating with the marketplace 104) .

Also shown as part of the EDrop system 106 is a trader terminal 144 , a risk management system 146 and a stock option order message queue 148 . An internal network (shown as Ethernet 150 in the figure) connects servers 132-142, trader terminals 144, and risk management system 106. The external real-time quote server 152 provides real-time stock quotes and other statistics for the quote server 140 .

EDrop system 106 is connected to OFP 102 via WAN (wide area network) 154 (although the EDrop system 106, OFP 102, and marketplace 104 could all be connected together via a simple network). At the same time that OFP 102 generates a stock options order for market 104 , OFP 102 also generates a copy of the stock options order and transmits it to EDrop system 106 . Therefore the EDrop system 106 can receive the stock option order at the same time or within a few milliseconds after the market 104 .

A copy of the stock option order is queued in the order message queue 148 . The queue server 136 monitors the queue for new stock option orders, retrieves the stock option orders, and submits them to the trader terminal 144 . So far, the queue server 136 (or the software running on the trader terminal 144) can identify the stock option contract elements from the stock option order, which include high-quality securities, stock option quantity, expiration date, transaction price and contract An identifier (such as an alphanumeric string).

As will be described in more detail below, a trader operating the trader terminal 144 may then determine a potential hedge amount and a potential hedge price based on the stock option order. The EDrop system 106 then submits to the marketplace 104 for fulfillment a reverse order related to the stock option order specifying the contract elements including the contract identifier, premium security, strike price and expiration date, and Potential hedge quantity and potential hedge price.

Referring now to FIG. 2, an embodiment of a pop-up menu 200 displayed on a trader terminal 144 is illustrated. The pop-up menu 200 gives the current market bid 202 and ask 204 prices in the market 104 (and other markets) for stock option orders. The pop-up menu 200 also presents an Ask 206, Trader Bid 208, and Trader Quantity entries 210 for the trader, a Refresh button 212 (to update the current Bid and Ask), a Submit button 214, and a Cancel button. Pressing the submit button represents a submit indication to the EDrop system 106 that the trader wishes to send a reverse order to the market 104 . The reverse order is prepared by the EDrop system 106 with the trader's bid or ask price and the trader's quantity indicated in the pop-up menu 200 .

Also shown in the pop-up menu 200 are risk management entries 216 for WJNAS (contract symbol for this example) Delta, Gamma, Vega, Theta, and Rho, the trader's current location, and the trader's new location. This risk management entry represents trading parameters, boundaries or references and provides trading guidelines for traders. The pop-up menu also includes other information, including an indicator for immediate proceed or cancel (i.e., immediate fulfillment or cancellation at the stated price and quantity at the time the order is placed), date (i.e., the current order is valid for its The stated quantity and price are valid throughout the day on the day of entering the market), MKT (that is, a market order to trade at the quantity specified by the market and at the current price), NH (the price that is not held, that is, the specified quantity without maintaining an order at a specified price), E-size (number of orders received from OFP 102), for the average value of ___, which is 31.836, 31.25 from the values in Figure 2 for WJNAS , 32.81, 97.4375 and 97.5 times were obtained.

Referring back to Fig. 1, the EDrop system 106 uses the link 156 connected between the gateway 142 and the electronic drop order server 158 in the market 104 to transmit the reverse order, and can use the link 160 to return the execution result message to EDrop system 106. Results of the processing of reverse orders in marketplace 104 may also be reported to OFP 102 via trade matching module 122 and OCC module 128 .

It should be noted that the decision to potential hedge quantity, potential hedge price, and submit a reverse order can be made automatically. In other words, in some embodiments, the EDrop system 106 may automatically make reverse order decisions for each preferred order or group of preferred orders based on, for example, risk management criteria. The remaining preferred orders may then be submitted to the trader terminal 144 .

For example, an IBM stock option order specifies the purchase of 50 IBM call options. Submit IBM stock option order to market 104 by OFP 102, also submit a stock option order to EDrop system 106 at the same time. When the IBM stock options order enters the market 104, the IBM stock options order (and additional information as indicated above in FIG. 2) is submitted by the EDrop system 106 to the trader terminal 144. It is then up to the trader to decide whether to fulfill the order in whole or in part (or not at all).

For example, a trader attempts to exercise 15 out of 50 call options. In response, the EDrop system 106 provides a reverse order to the marketplace 104 relative to the original order. In other words, the EDrop system 106 places a stock option order to sell 15 IBM call options. In the market 104, this reverse order and the original order can be hedged so that 15 of the 50 IBM call options are fulfilled through the EDrop system 106 through the supply structure of the market 104.

Although only a single OFP 102, marketplace 104, and EDrop system 106 is shown in FIG. 1, there may be multiple interconnected OFPs, marketplaces, and EDrop systems. The EDrop system preferably converts stock option orders (or other messages) sent by each OFP into an internal standard format capable of processing them. Outgoing messages (including reverse orders) are converted to a format compatible with their destination (eg, market 104).

Turning now to FIG. 3, a data flow diagrammatic representation of the processing performed in the EDrop system 106 is shown. OFP 302 sends a copy of the stock options order (and possibly other messages) to EDrop system 304. The EDrop server 304 preferably converts the format of the OFP 302 stock options order copy to the internal trading system format. Preferably, the same internal transaction system format is used for each OFP that may be connected to the EDrop server 304. For example, OFP 302 may send a copy of a stock options order listing feed code MSQVA. This feed code is then interpreted as an October 105 put option on Microsoft Corporation (MSFT) according to the criteria specified by the OCC (Stock Option Clearinghouse, Inc.). Its quantity can be obtained from the line following the stock option order copy.

The fields provided in the internal transaction system format are listed in Table 1 below. These fields can be stored in individual variables, or collected into one or more data structures. Table 1 A. Message header B. Transaction Destination C. Transaction number D. Transaction status E. Transaction date F. Trading hours G. Order Confirmation Time H. Executive company I. Executive Broker J. Mark K. Symbol L transaction code M. Expiration date N. Transaction price O. Price P. Quantity Q. Open volume R. Minimum amount S. Limited time order T. Valid before encoding U. Valid until V. Stop Limit W. Stop Price X. Cautious part Y. Commission rate Z. Account AA. Sub-account BB. Clearing Corporation CC.Path Coding DD.Expert EE. Seat ID FF. User data GG. User Notes HH. reserved space

The format of a stock options order can vary from OFP to OFP. For example, OFP 102 may use the fields shown in Table 2 below. Table 2 1. Buy/Sell 2. Call option/put option 3. Quantity 4. Symbol May 6. Settlement 7. Price type 8. Execution type 9. Company order type 10. Price 11. Path ID 12. Account ID 13. Serial number 14. Transaction 15. Filler

A typical conversion relationship between the fields shown in Table 2 and the fields of the internal transaction system shown in Table 1 is:

1 - J

1 - J

3 - P

4 - K

5 - M

6—N

7——J or S-X (according to price type)

8 - J

9 - J

10 - V

14 - B and/or CC

Other internal fields can be ignored and stored in a database. It should be pointed out that the internal trading system format can include many fields, which do not necessarily need to be specified in the format of a given OFP stock option order. While some fields are provided above, fields in more complex stock option orders received from other OFPs can also be maintained and manipulated in the EDrop system 106 .

The first filtering operation 306 is performed on the message by the EDrop server 304 . The first filtering operation 306 allows for an immediate reduction in the number of orders checked by client-side processing. The content of this filter includes:

size (the size of the order on which the trade was made),

order type (the execution type or price form of the order applied to the trading venue),

Path (to be forwarded to customer service according to the specified path, ie the exchange where the order will be traded).

Other filters include: Premium Symbol, Industry Sector, Beta, and OFP Spread Criteria. An example of filtering used to detect size is: If the order size specified by the contract is smaller than the autotrade (automatically executed trade) size, then filter out the order (i.e., not provide the order to the client-side processing described below).

Examples of execution types include combined or extended order, GTC (good till canceled), Day (good today order), IOC (immediately proceed or cancel), or ANO (all or nothing). Examples of price forms include Market (market price), Limit (limit to user price), and NH (do not hold at specified price).

All received messages are stored in the non-filtering database 310 through a text dump process. Those messages that pass the first filtering process 306 are stored in a filtered database 314 using SQL database processing 312 . In this way, the filtered database 314 preferably keeps the messages that meet the order conditions, and when these orders have passed the primary review, a reverse order that will be described below can be generated.

Continuing to refer to FIG. 3 , those packets that have passed the first filtering process 306 will then pass through a second filtering process 316 . As an example, the second filtering process 316 can reduce the number of orders seen by the end user by performing client-side filtering, which can be achieved by eliminating orders that meet some set of user-definable criteria.

The criteria can include, for example

marketability (i.e. how much the order is worth compared to the price available in the market),

Delta risk (i.e., the direct risk in the order),

Position risk (ie, how the order is viewed will affect the current position at the deal level, month level, and global location management level).

As an example, a filtering check for marketability could be accomplished by determining the current NBBO (National Best Offer/Ask) and only sending orders that are near or within these parameters.

Other filtering criteria include: Theta, Vega, and Gamma filtering, as well as volatility filtering, and corporate shareholder decision filtering. Custom settings for price relative to edge filtering are available for advanced filtering, as well as profit and loss and unit filtering that refreshes based on changes in current position. At this point, it is optional to provide an API that can perform additional filtering. The API provides call option functionality to alter this filtering when market conditions or positional strategies favor these changes.

The messages (generally stock option orders) that pass the second filtering process 316 are submitted to the EDrop client 318 . EDrop client 318 provides the stock option order copy information (and additional information such as shown in FIG. 2 ) to the trader terminal. Alternatively, the EDrop client 318 can also automatically determine the potential hedge amount and the potential hedge price, and automatically submit the reverse order to the marketplace 104 .

Reverse orders sent to the marketplace 104 are preferably stored in an order table 322 in the database. After confirming partial or full fulfillment, the EDrop client 318 may then store the relevant fulfillment information in a provisioning table 324 in the database. Another trade table is also provided for stock, bond, and other securities trades that are not derived from the placement and confirmation of stock option orders.

Referring now to FIG. 4 , there is shown a flowchart 400 of a method of stock option trading implemented in software in the EDrop system 106 . The EDrop system receives (402) a copy of the stock options order from the OFP and converts (404) it to the internal trading system format.

Next, the EDrop system 106 identifies (406) the contract elements in the copy of the stock options order. The contract elements may include, for example, a contract identifier, premium security, strike price, stock option quantity, and expiration date. As noted above, the EDrop system 106 can filter (408) the copy of the stock options order and display (410) the judgment information in the trader's terminal. This judgment information includes, for example, the contract elements identified above, as well as premium security bids and asks (possibly in different markets), stock option bids and asks, risk management variables, and the like.

Potential hedge quantities and prices are then determined (412) by the trader, while the EDrop system 106 monitors (414) the commit indicator (eg, click on the commit button 214). The EDrop system 106 then obtains the potential hedge amount and price from the trader's terminal and provides (416) the reverse order relative to the original stock option order to the market. The reverse order includes, for example, contract elements including contract identifier, prime security, strike price, expiration date, potential hedge amount, and potential hedge price. Next, the EDrop system 418 receives the order fulfillment message from the marketplace 104 or OFP 102. These fulfillment messages may include, for example, full fulfillment, partial fulfillment or cancellation, and are typically maintained in a database in the EDrop system 106 for tracking and reporting purposes.

As noted above, the EDrop system 106 can also automatically determine (420) a potential hedge amount and a potential hedge price. At this point, the EDrop system can test risk management criteria, such as described above. As an example, if order information submitted from an OFP has an increased risk of volatility to its trading location, only orders with reduced quantities will be fulfilled. Next, the EDrop system 106 can automatically determine the reduced potential hedge quantity and the potential hedge price equal to NBBO (ie, the best domestic offer).

While the invention has been described with reference to its preferred embodiments, it will be apparent to those skilled in the art that various modifications and equivalent substitutions can be made without departing from the scope of the invention. In addition, many modifications may be made to adapt a particular procedure, structure or material without departing from the scope of the invention. Therefore, it is intended that the above description not limit the invention to the particular embodiments disclosed, but the invention will cover all embodiments falling within the scope of the appended claims.

Claims (23)

1. A method for trading stock options comprising: Receive a copy of a stock options order concurrently submitted to the market; Identify contract elements of a stock options order, including contract identifier, premium security, strike price, and expiration date; Obtain the potential hedge quantity and potential hedge price based on said stock option order; and A reverse order is submitted to the market relative to said stock option order, the contract elements specified in the order including the contract identifier, expiration date, prime security, potential hedge quantity, and potential hedge price. 2. The method of claim 1, wherein said receiving step comprises receiving a stock option order selected from a group of stock option orders, the group of stock option orders comprising buying a call option, selling a call option, Buy put options and sell put options. 3. The method of claim 2, wherein the step of submitting includes submitting a sell call option when the stock option order is a long call option, and submitting a buy call option when the stock option order is a sell call option. Enter call options. 4. The method of claim 3, wherein said submitting step comprises submitting a sell put option when the stock option order is a buy put option, and submitting a buy put option when the stock option order is a sell put option put option. 5. The method of claim 1, wherein said receiving step includes accepting a stock options order from an order flow provider that simultaneously provides said stock options order to the market. 6. The method of claim 1, further comprising the step of converting said stock options order from an order flow provider format to an internal trading system format, and said step of submitting includes submitting a reverse order in a market format A step of. 7. The method of claim 6, wherein said step of receiving further comprises the step of receiving an additional stock option order from an additional order flow provider, and further comprising transferring said additional stock option order from the additional order Steps to convert the stream provider format to the internal transaction system format. 8. The method of claim 1, wherein the determining step includes displaying at least the premium security, the number of stock options, at least one of the stock option bid and ask price, and an ask price on the trader terminal, and monitoring the trader terminal The commit indicator for . 9. The method of claim 8, wherein said step of displaying further includes displaying bids and counter-offers for premium securities in the market. 10. The method of claim 9, wherein the step of displaying further comprises displaying risk management variables based on contract elements. 11. The method of claim 1, further comprising the step of filtering stock option orders prior to determining a potential hedge amount. 12. The method of claim 11, further comprising the step of storing stock option orders in a filtered database as they pass the filter. 13. The method of claim 1, further comprising the step of storing stock option orders in an unfiltered database. 14. An electronic tap server for stock option trading, the tap server comprising: a processing circuit; an order flow network connection coupled to said processing circuit; an inverse order network connection coupled to said processing circuit; and a memory coupled to said processing circuit and storing therein information for execution by said processing circuit: instructions for receiving a copy of a stock options order via an order streaming network connection that is concurrently submitted to the market; An instruction to identify the contract elements of a stock options order, including the contract identifier, premium security, strike price, and expiration date; an instruction to obtain a potential hedge amount and a potential hedge price based on said stock option order; and An instruction to submit to the market for fulfillment a reverse order relative to said stock option order via a reverse order network connection, said reverse order specifying contract elements including contract identifier, expiration date, prime security, potentially The amount of hedging and the potential hedging price. 15. The electronic tapping server according to claim 14, wherein the instructions for submitting reverse orders include instructions for the following operations: Used to submit a sell call option when the stock option order is a buy call option, submit a buy call option when the stock option order is a sell call option, and submit a sell option when the stock option order is a buy put option put options, and submitting a buy put option when the stock option order is a sell put option. 16. The electronic branching server according to claim 14, characterized in that the memory also stores: Instructions to convert this stock options order from the order flow provider format to the internal trading system format. 17. The electronic branching server according to claim 14, wherein the memory further comprises: Instructions for displaying at least the premium security, stock option quantity, offer and counter-offer on the trader terminal, and monitoring the submission indicator on the trader terminal. 18. The electronic branching server according to claim 14, wherein the memory further comprises: An instruction to filter stock option orders before determining potential hedge quantities. 19. A computer program product for trading stock options, the product comprising: A storage medium readable by a processing circuit, the memory storing information for execution by said processing circuit: instructions for receiving a copy of a stock options order via an order streaming network connection that is concurrently submitted to the market; instructions for receiving a copy of a stock options order via an order streaming network connection, the stock options order being simultaneously submitted to the market; An instruction to identify the contract elements of a stock options order, including the contract identifier, premium security, strike price, and expiration date; an instruction to obtain a potential hedge amount and a potential hedge price based on said stock option order; and An instruction to submit to the market for fulfillment an inverse order relative to said stock options order via an inverse order network connection, the inverse order specifying contract elements including contract identifier, expiration date, prime security, potentially The amount of hedging and the potential hedging price. 20. The computer program product of claim 19, further comprising submitting a sell call option when the stock option order is a long call option, submitting a buy call option when the stock option order is a sell call option Options, submit an order to sell a put option when the stock option order is a buy put option, and submit an order to buy a put option when the stock option order is a sell put option. 21. The computer program product of claim 19, further comprising instructions for converting the stock options order from an order flow provider format to an internal trading system format. 22. The computer program product of claim 19, further comprising instructions for displaying on the trader terminal at least the premium security, the stock option quantity, the offer price, and the counter offer, and monitoring the trader terminal for a submission indicator. 23. The computer program product of claim 19, further comprising instructions for filtering stock option orders prior to determining a potential hedge amount.

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